Pension benefits to be cut
23/07/2014
The government has proposed plans to reduce the benefit a person receives for delaying their state pension payments.
Under current rules, people nearing the state pension age are encouraged to keep on working and delay taking their state pension. As a reward for deferring pension payments, a person can receive an extra 10.4% state pension for each year that payments are deferred.
However, this could drop to 5.8% as early as 2016 to coincide with the new flat rate pension.
This reduced incentive to continue working means that in order to make a deferred pension financially worthwhile, a person would have to live for 19 years into retirement, as opposed to 10 years under the current rules.
However, whilst the new rules are unlikely to generate support from those nearing the retirement age, Tom McPhail, head of pensions at Hargreaves Lansdown was not surprised by the decision.
McPhail said: "With the population living longer and more people staying in the workforce later, it is hardly surprising that the government has chosen to cut back on this generous rate of return".
He continued to say that the new rate is still an “attractive proposition” to people who are generally healthy and have “substantial private savings”.
Neutral view to retirees
Whilst the current rules were originally brought in during the 1990s as an incentive for people to delay taking their state pension, the Department for Work and Pensions (DWP) have now stated that they have taken a “neutral view” as to when they would prefer people to start taking their state pension.
As a result, the government felt necessary to adopt a more cost-neutral view when deciding how much a person should be incentivised to delay retirement.
Pensions minister, Steve Webb said that the decision to reduce pension benefits was a fair one which was based on advice from the Government Actuary.
The government have taken action in recent years to reduce pension payments to an aging population as businesses can no longer force a person to retire at state pension age. Additionally, MPs have also suggested that the state pension age could be increased faster than previously expected.
Need financial advice?
If you need to ask a financial question then please contact our financial advisers online or over the phone to get help with your query.
Share this..
Related stories
Do I need a pension?
Many people don't take the opportunity to arrange a pension plan. There are other things in life, particularly at a young age, which people would find more important than organising a pension. This is perfectly normal, but a major role of a financial advisor is to ensure the protection of a person’s long term financial future, and starting a pension scheme is one way of doing this.
I...
Read MoreHow much do you need to retire?
A report by MGM Advantage claims that the average couple in the UK will require £600,000 to be able to enjoy 20 years of retirement. While there is a large variation in the cost between the South and the North of England, with London couples said to require £194,602 more than their northern counterparts, it will come as a shock to many in the UK. The report also suggests that the cost of livi...
Read MorePensions under attack
On Thursday the 30th June 2011, the British government will face the biggest outbreak of industrial action since it came to power as civil servants join teachers and lecturers in a major strike over pension reforms.
The Tory-led coalition wants to alter the pension age, change the way that pensions are calculated and increase worker's contributions
Over 750,000 public sector wor...
Read MoreIs Sir Fred set to give back part of his pension?
He may be holed up in a private estate on the French Riviera but rumours circulating in the financial markets suggest that Sir Fred Goodwin is in negotiations, via his lawyers, to give back half of the additional pension supplement he was offered by Royal Bank of Scotland. If the agreement is completed this will see his pension reduced from £555,000 a year to a mere £342,500 a year. So what exac...
Read MoreIs your company pension scheme safe?
It has been revealed this weekend that a growing number of UK companies are reducing their contributions to staff pension funds in order to retain as much money on deposit as possible in these troubled times. This is a very tricky situation and one which is set to get more complicated as the recession rolls on. So is your pension at risk if your employer decides to reduce pension contributions?